The 43rd GST Council Meeting held on May 28, 2021, led to a series of important fiscal and GST related decisions. With an aim to provide a level playing field to the domestic vis-a-vis foreign service providers qua the maintenance, repair, and overhaul (MRO) services in the shipping sector, the following recommendations were made by the Council (which have now been notified):
- GST on MRO services in respect of ships/vessels reduced to 5% from erstwhile 18%
W&B Comment: It is important to note that the position regarding input tax credit is unchanged and hence the industry shall enjoy dual benefit of tax reduction and input tax credit.
- Place of Supply (“PoS”) for B2B supply of MRO Services in respect of ships/ vessels notified to be location of recipient of service [while the said services were earlier taxable basis the place of performance]W&B Comment: By this amendment, the Government has stipulated that for MRO services procured by foreign ships during transit in India i.e. the intervening period between arrival and departure, the PoS shall be the location of the recipient i.e. overseas location. Accordingly, such services shall be categorized as an “export of service”, and it shall be a “zero rated transaction” inviting no tax implications. Conversely, the MRO services which the Indian shipping companies would avail outside India, shall be considered as “import of service” and will now be exigible to IGST under reverse charge mechanism. In other words, IGST liability has been casted upon the Indian shipping lines in respect of services availed outside India i.e. non-taxable territory.It appears this recommendation has been made and effectuated without considering the below aspects:
- Pertinently, under the erstwhile Service tax regime, the MRO services were always taxed basis the place of performance of such services. Now, the change in PoS of the said services under GST regime is de hors the erstwhile position and tax implications qua Indian shipping lines.
- In terms of Section 13(3)(a) of the IGST Act, the PoS of services supplied in respect of goods which are required to be made physically available by the recipient of services to the supplier of services, is the place of performance of the said service. It is beyond doubt that repair and maintenance services qua goods can be provided only upon making such goods physically available. It is settled position that vessel qualifies as “goods” (both under GST and Customs law, separate rate of tax has been prescribed for vessel) and repair and maintenance services are rendered in respect of the vessel and not to the company owning such vessel. Therefore, in relation to MRO services where the goods i.e. “vessel” are made physically available, the PoS should be the place of performance of the said service.
- The repair and maintenance services provided in respect of any other category of goods eg: plant and machinery, are continued to be classifiable under performance-based services. Hence, the differential treatment now afforded to the MRO services qua “vessels” is irrational and unconstitutional.
- In the context of erstwhile Service Tax regime, the Hon’ble Gujarat High Court in Sal Steel Ltd. [2020-TIOL-163-HC-AHM-ST] inter alia held that “there is no power conferred upon the Central Government to make any Rules or Notifications for extraterritorial events; or in other words, for services rendered and consumed beyond the “taxable territory” i.e. beyond India.” Therefore, in relation to MRO services availed outside India, the Indian shipping companies cannot be legally mandated to discharge IGST as it will amount to taxing an extraterritorial event.
- The Indian shipping industry effectuating maritime transports accounts for 70% of India’s trading in value terms and entails larger significance than the budding MRO sector. This puts the domestic shipping companies to a disadvantageous position as compared to the foreign shipping lines, besides being made accountable to a potentially huge tax outgo.
In view of the above infirmities, this issue deserves to be adequately represented before the GST Council for its reconsideration so as to avoid imminent tax uncertainties and litigations.